Premium estimation inaccuracy and the actuarial performance of the US crop insurance program

Abstract

Purpose -The purpose of this paper is to explore the impact of the levels of inaccuracy associated with three different premium estimation methods, one of which attempts to mimic the protocol currently used by the Risk Management Agency (RMA), on the actuarial performance of the US crop insurance program. Design/methodology/approach -The analyses are conducted using empirically-grounded simulation and other computational methods, under various plausible assumptions about the producer's risk aversion behavior and knowledge of his/her actuarially fair premium. Findings -Regardless of the assumed producer knowledge and behavior, it is concluded that the persistently high government subsidy levels required to keep the program solvent could be solely explained by the inaccuracy in the RMA's premium estimates. In other words, the observed need for large subsidies does not necessarily imply that the program is systematically favoring less efficient farmers or particular crops or production areas. Also, contrary to the commonly accepted "adverse selection" argument, it is shown that farmers having more information about their actuarially fair premiums than the insurer is not the reason why high subsidies are needed. Actuarial performance, however, could be improved by using the more elaborate methods exemplified in the paper, as well as larger sample sizes for premium estimation. Originality/value -The paper provides conclusions and recommendations that could substantially reduce the amount of public subsidies needed to keep the US crop insurance program solvent.

Crop Insurance Savings Accounts: A Viable Alternative to Crop Insurance?

“…The explanation rests on the previous evidence about the impact that premium estimation inaccuracy has on the actuarial performance of crop insurance. Specifically, Ramirez and Carpio (2012) show that, under rational producer behavior, premium estimation inaccuracy can solely explain the substantial subsidies that have been required to keep the program operating. Because of insurer and producer uncertainty about what the actuarially fair premium is, without subsidies, many farmers would feel that they are being overcharged and thus not participate.…”

Race and premium misrating in the U.S. Federal Crop Insurance Program

“…Researchers have previously documented various issues with how the RMA determines its premium rates, and there is a substantial literature addressing the potential misrating of crop insurance premiums. This literature has primarily focused on either geographic misrating induced by differences in expected yield (Chen et al, 2020; Maisashvili et al, 2019; Woodard et al, 2011; Woodard et al, 2012) or comparing actuarial performance of different rating methods (Ramirez & Carpio, 2012; Sherrick et al, 2004). Woodard et al (2011) note that a unique complication with using LCRs for setting insurance rates is that crop yields tend to increase over time.…”

The impacts of multiperil crop insurance on Indonesian rice farmers and production

“…MPCI crop insurance has been extensively studied for developed countries, particularly for the United States (see, for example, Goodwin, ; Just et al., ; Ramirez and Carpio, ; Smith and Baquet, ; Woodard et al., ) . Notably, Coble et al.…”